After the VC Term Sheet is Signed – It’s Not Over Yet

After completing a long process identifying the right venture firms
to pitch, running an exhaustive fundraising process, finding a mutual
fit, and successfully negotiating terms… at last, the term sheet is
signed. So at this point it’s OK to just hand the process over to your
lawyers, sit back, and let them work out the details, right? Wrong.

The two- to six- week time between the signing of the term sheet and closing is “venture limbo.”
At this point, entrepreneurs know who they’re going to be working with
and along what structure, but the deal isn’t done yet… including wiring
of the funds! Most of this time-period is taken up by lawyers drafting
and then negotiating the finer legalese points of the full set of legal
documents. But it also includes legal due diligence, rounding out the
round with additional syndicate investors (often angels in seed rounds),
figuring out allocations, as well as sometimes even (but hopefully not)
additional business diligence for the institutional venture investors.

The problem is that time kills all deals.
The longer this limbo period extends, the more risk is introduced that
the process will veer off course or even fall apart entirely. It should feel like things are accelerating
towards a close, as opposed to marching along at a steady pace; and it
certainly should not feel like deceleration towards the end.

The
possibility of negative scenarios adversely affecting the outcome range
all the way from some uncontrollable exogenous disastrous macro event
(of which there have been a few major ones in the last dozen years) to
the possibility of a venture firm simply getting cold feet and backing
out. Obviously, only the latter is within the locus of control of
everyone involved. It doesn’t matter the reason – a competitive funding
announcement, a customer loss, a bad month of results – with more time, the increased chances of more emerging mitigating factors to getting the deal completely finalized.
And even if the relationship with the VC partner leading the investment
seems solid, entrepreneurs have little window into his partnership
political dynamics during that time which could force him to lose his
hold on pushing the commitment over the line.

What can extend the
month of limbo? Lawyers going back and forth on minute/inconsequential
details, of course. But frequently, there is time spent negotiating
business terms which weren’t specified in the tern sheet itself. Founder
vesting is the most common example. Or sometimes VCs renegotiate terms
or introduce new concepts – nefarious, but I’ve seen other firms
exerting their negotiating leverage in a relationship given this
situation. And I’ve seen weird unpredictable situations crop up that
delay things, too. As an extreme but real example, once a standard
background check which was run on the startup’s CEO reported that
someone with his exact name from his exact town was a felon convicted
of embezzlement. It turns out it was literally the wrong guy, yet same
name / different person, and the entrepreneur was asked to sign an
affidavit maintaining it wasn’t him. But the whole cycle delayed the
closing and almost derailed things because of the uncertainty.

The
good news is that these scenarios don’t happen often. At the end of the
day, a VC signs a term sheet for a reason: they’re making an agreement
under the circumstances which they’re eager to do. The job of the
entrepreneur is to ensure those circumstances don’t change too much in
the interim. And most VCs (including all of us at NextView) pride
themselves on their reputation about keeping their word, not backing out
of term sheets or renegotiating after they’ve been signed. But the
takeaway here is that the fundraising process isn’t complete until the money is in the bank.